What does this mean for real estate investing for beginners, and is it still feasible to enter the market? In short, yes it can be very feasible. However, you need to make informed decisions.
Otherwise, you may end up losing rather than making money.
So, start right here by reading on to find out the ABC’s of real estate investing. With knowledge and research under your belt, you will be equipped to dip your toes in real estate investing without biting off more than you can chew.
Why Real Estate Investing for Beginners Can Be an Opportunity
First up, let us take a look at why real estate investing for beginners can be a lucrative opportunity, and not as scary as it sounds!
The reason for this is that with real estate, you can use leverage to invest in an asset/opportunity that you would not have been able to by paying upfront.
The traditional downpayment amount for mortgages used to be 20 percent. However, this has changed, and in some cases, it is possible to put down as little as 5 percent on a property. In either case, this opens up real estate investment opportunities that many beginners would not otherwise have access to.
Another reason why real estate can be a good investment for beginners is that it is very tangible. Unlike the case with intangible investment scams—as long as the transfer goes smoothly, nobody can abscond with your investment. Something that can be a distinct danger in private investments and schemes.
The Different Types of Real Estate Investment Income
The first thing you need to know about when learning how to start investing in real estate is the different types of income that can be generated.
The first is appreciation income. This is the value that you gain when a property that you are holding becomes worth more than what you bought it for. If you purchased real estate in a favorable buyer’s market, then it is likely that you will experience this.
However, if you bought when prices were at a premium, and had to sell when prices were down, you could instead lose money.
The other income type that can stem from real estate is rental income. This is any money coming in from the rental of properties.
While rental income might sound like a convenient source of hands-free passive, in reality, this money is generally used for mortgages, property repairs, property management, insurance, etc.
In most cases, it is only after a property or properties have been paid off that rental proceeds can become a true stream of passive income. However, generally, rental income can help substantially with bond payments and is not something to be disregarded.
REIT income is technically interest. REITs are real estate investment trusts. These trusts allow investors to gain portfolio exposure to real estate investments without any of the hands-on decision making and management that is required by regular real estate investment.
With REITs, you will not be able to take advantage of leverage. However, you will be able to receive interest on your investments with relatively low levels of risk.
What to Watch out For
One of the most important things when learning how to start real estate investing is knowing what to watch out for.
Some of these common areas of risk are:
If the market is booming, it can be hard to foretell when a property slump is coming. Property slumps can often be particular to an area, and so are often difficult to forecast.
However, it is always a good idea to analyze the historical property prices in the area you wish to buy in. Try to see if they are any patterns. If so, are prices at a peak, at a low, or somewhere in between.
Additionally, on what time frame are these price cycles? This will give you an indication of whether or not you will see a return on your investment, and within what time frame.
When buying real estate, another is to look into thoroughly is potential rental pitfalls.
Newcomers to real estate investing are often eager to see that after calculations, the rental they can get for a property will far outstrip the mortgage the need to pay on it.
Old hands, however, know that even with a comfortable rental/mortgage payment margin, issues can arrise.
For example, if a tenant moves out, it can often take a few months to get the property back on the market. In this time, the mortgage payments still need to be made, and you likely had to do some repairs.
To guard against this situation, it is always a good idea to check local vacancy rates in the area you are looking to buy in. You can do this by checking census data, asking local real estate agents and property managers (like ourselves).
High Mortgage Interest Rates
One of the advantages of real estate investing is that it allows you to use leverage to realize the opportunity. Something that other investments do not.
However, with leverage, it is vital that you are cautious and do not overextend yourself.
For one, investing in real estate with a small deposit will result in higher mortgage payments. If the rental on the property not enough to cover these and maintenance costs, and property management fees—you could end up paying in more than you expected.
If this situation is not sustainable, you could be forced to sell the property at a loss, or even lose it entirely in dire circumstance.
Is Real Estate Investing for You?
Now that you have read this guide on real estate investing for beginners, do you feel that the market is for you?
While there are some risks involved, as well as hands-on engagement with your asset, real estate can prove a valuable vehicle for building wealth. As said by the great Andrew Carnegie, “90 percent of the world’s millionaires become so through owning real estate.”
What is more, with the right property managers at your disposal, much of the arduous work of property ownership can be taken off your hands. If you want your real estate assets to run like a well-oiled machine, then contact us. We offer full-service property management in DC, Northern Virginia, and parts of Maryland, as well as free rental analysis.
Browse our services today, and let us give you peace in your mind property ownership.